Bombay High Court
Taparia Tools Ltd. vs Joint Commissioner Of Income-Tax on 8 January, 2003
Equivalent citations: (2003)180CTR(BOM)256, [2003]260ITR102(BOM), [2003]41SCL430(BOM)
Author: S.H. Kapadia
Bench: S.H. Kapadia, J.P. Devadhar
JUDGMENT S.H. Kapadia, J.
1. The above six appeals have come before this Court under Section 260A of the Income-tax Act. Income-tax Appeal Nos. 88 of 2001, 89 of 2001 and 90 of 2001 are filed by the assessee whereas, Income-tax Appeal Nos. 155 of 2001, 180 of 2001 and 181 of 2001 are filed by the Department. For the sake of convenience and brevity, the facts in Income-tax Appeal No. 89 of 2001 are hereinafter mentioned.
Facts
2. During the assessment year 1996-97, the assessee issued Non-convertible debentures aggregating to Rs. 6,00,00,000 on a private placement basis. The face value of the debenture was Rs. 100 each. As regards payment of interest on debentures, the debenture-holders were at their option either periodically receiving interest on half-yearly basis at 18 per cent per annum for five years or one year upfront payment of Rs. 55 per debenture. The option in respect of payment of interest was to be exercised within 30 days of the date of allotment. Under the terms of the issue, the debentures could be redeemed at par along with 10 per cent redemption premium at any time after the end of the fifth year but not beyond the seventh year.
3. The debentures were allotted to the following parties on the dates indicated hereinbelow :
Party Amount (in lacs) Date of allotment
1. Maliram Makharia stock Brokers Pvt. Ltd.
495.00 29-3-1996
2. Orient Corporation 1.25 19-6-1996
3. Shree Suyog Agencies 1.25 19-6-1996
4. Shree Kyamsap Enterprises 1.25 19-6-1996
5. Shree Suraj Agencies 1.25 19-6-1996
6. Sharp Knife Co. Pvt. Ltd.
100.00 19-6-1996 600.00
4. The debentures at serial No. 1 in the above statement was allotted in the accounting year ending 31-3-1996 whereas, the debentures at serial Nos. 2 to 6 were allotted in the accounting year 1996-97. The parties (Lenders) at serial No. 1 and serial No. 6 were Maliram Makharia Stock Brokers Private Limited and Sharp Knife Company Private Limited.
These Lenders opted for one time upfront payment of Rs. 55 per debenture of face value Rs. 100 payable on allotment. They opted for Deferred Interest Option (i.e., D.I.O.).
5. Accordingly, the upfront payment of Rs. 2,72,25,000 became payable to Maliram Makharia Stock Brokers Private Limited on 29-3-1996 and Rs. 55,00,000 became payable to Sharp Knife Company Private Limited on 19-6-1996. The parties at serial Nos. 2 to 5 opted for payment of interest at 18 per cent per annum payable half-yearly i.e., Interest Option.
6. The upfront payments payable on debentures were shown by the assessee in their financial statements as 'Deferred Revenue Expenditures' and written off over a period of five years. Similarly, premium of Rs. 60 lacs was proportionately debited to each year's Profit & Loss Account @ 20 per cent and credited as Reserve on Liability side of balance-sheet. However, in its returns for accounting year ending 31-3-1996, the assessee claimed the entire upfront payment of Rs. 2,72,25,000 to Maliram Makharia Stock Brokers Private Limited as fully deductible expenditure though the assessee did not debit the full amount or any part thereof to its Profit and Loss Account. Similarly, the assessee claimed full deduction for Rs. 55,00,000 in its return for the year ending 31-3-1997. The Assessing Officer disallowed the claim of the assessee for full deduction of Rs. 2,72,25,000 and Rs. 55,00,000 on the ground that the entire liability regarding discounted interest paid upfront has not been incurred in the accounting year ending 31-3-1996 and 31-3-1997. It was also disallowed on the ground that the approximate income which the assessee would have earned by utilization of Rs. 495 lacs and Rs. 100 lacs, which the assessee borrowed by way of Non-convertible debentures, was not offered for taxation. The Assessing Officer also relied upon the judgment of the Supreme Court in the case of Madras Industrial Investment Corpn. (MIIC) Ltd. v. CIT [1997] 225 ITR 802, 91 Taxman 340 The Assessing Officer held that Rs. 2,72,25,000 and Rs. 55,00,000 represented deferred interest and, therefore, they were not allowable in entirety during the accounting year ending 31-3-1996 and accounting year ending 31-3-1997. Accordingly, he estimated the expenditure by applying the discount rate of 18 per cent per annum on Rs. 495 lacs and Rs. 100 lacs and apportioned the expense over five years. In the circumstances, for the assessment year 1996-97, the Assessing Officer brought back to the assessee's income Rs. 2,71,50,750 by allowing deduction of only Rs. 74,250 calculated at 18 per cent per annum for 3 days from 29-3-1996 to 31-3-1996 on Rs. 495 lacs (i.e., Rs. 89.10 lacs per annum.)
7. Being aggrieved, the assessee carried the matter in appeal to the CIT, who took the view that repayment of Rs. 2,72,25,000 was repayment of capital out of the total borrowing of Rs. 4,95,00,000. He further concluded that the capital actually borrowed was, therefore, only Rs. 2,22,75,000 and not Rs. 4,95,00,000. The CIT, therefore, allowed interest at 18 per cent. on the reduced capital borrowed amount of Rs. 2,22,75,000 for 3 days. The CIT further concluded that the entire scheme was to avoid tax. He, therefore, placed reliance on the judgment of the Supreme Court in the case of McDowell & Co. Ltd v. CTO [1985] 154 ITR 148, 22 Taxman 11.
8. Being aggrieved by the order of CIT (Appeals), the assessee preferred an appeal to the Tribunal. The Income-tax Appellate Tribunal [ITAT] restored the order of the Assessing Officer. Being aggrieved, the assessee has come in appeal to this Court under Section 260A of the Income-tax Act.
9. Large number of questions have been framed by the assessee and the Department in the respective set of appeals under Section 260A of the Income-tax Act. Under that section, duty is cast on the High Court to frame substantial question of law. Accordingly, the following substantial question of law has been framed by the High Court which is as follows :
"Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that even though, the liability of payment of interest stood liquidated in the first year itself, such liability had to be allowed on a spread over basis over the life of the debentures?"
Arguments :
10. Mr. Dastur, learned senior counsel appearing on behalf of the assessee in support of the assessee's appeals contended that under the terms of Issue, two options were given to the Lenders. Under Interest Option, the assessee offered to pay half-yearly interest at 18 per cent per annum till redemption. Whereas, under the Deferred Interest Option, upfront payment of Rs. 2,72,25,000 was offered and paid by the assessee to the Lender in the year of allotment. He contended that on 29-3-1996, the assessee received from Maliram Makharia Stock Brokers Private Limited Rs. 4,95,00,000 and on the same day under the terms of contract, the assessee repaid interest of Rs. 2,72,25,000. He contended that if Rs. 100 was received by the assessee on 29-3-1996, then the assessee, under the terms of the contract, became liable to pay to Maliram Makharia Stock Brokers Private Limited Rs. 55 on 29-3-1996 itself. He contended that under the terms of the contract Rs. 100 was received by the assessee which was repaid after five years. He, therefore, contended that the up-front payment of Rs. 55 on 29-3-1996 was on account of interest. He contended that in the circumstances, the CIT was wrong in treating payment of Rs. 55 to be on capital account. He contended that even the terms of the issue read as follows :
"Each debenture shall carry interest at Rs. 55 per debenture payable up-front within 30 days of the exercise of option or from the date of allotment whichever is earlier."
He contended that under the terms of Issue, 10 per cent premium was also payable on the face value at the end of five years at the time of redemption. He conceded that in the final account, the assessee has not debited any amount in the first year to the Profit & Loss Account. That, from the second year onwards the assessee has debited one-fifth of Rs. 55 to the Profit & Loss Account. He, however, contended that in this case, we have to go by the terms of the Issue. That, we cannot go by the entries in the Profit & Loss Account. He contended that, for the accounting purpose, the assessee has debited one-fifth of Rs. 55 for five years but, for the purposes of deciding this matter, the Court has to go by the liability of the assessee arising under the terms of the issue and that the Court cannot go by the entries in the Profit & Loss Account. Mr. Dastur further conceded that although the 10 per cent premium was payable at the time of redemption, the assessee has debited one-fifth of that premium to the Profit & Loss Account. He further contended that the judgment of the Supreme Court in MIIC Ltd. 's case (supra) did not apply to the facts of this case. He contended that in MIIC Ltd. 's case (supra), they are concerned with the concept of premium payable at the time of redemption. That, in our case also, the assessee was liable to pay 10 per cent premium at the time of redemption and that the assessee has applied the test laid down in the MIIC Ltd.'s case qua 10 per cent premium which has been spread over the period of five years. However, in this case, he contended that we are not concerned with premium. That, we are concerned with the interest which became payable to the Lenders amounting to Rs. 55 in the very first year ending 31-3-1996 whereas, in the case of MIIC Ltd. (supra), the premium amount was payable after five years and, therefore, the Supreme Court has allowed amortization. He contended that in the present case, liability to pay interest arose in the first year ending 31-3-1996 and it was also discharged in the first year. He contended that the assessee was maintaining the Mercantile System of Accounting and under the terms of the Issue, the amount became a liability in the first year itself and, therefore, the Assessing Officer erred in spreading over the liability to pay interest for five years. Mr. Dastur further contended that in the case of MIIC Ltd. (supra), the liability to pay interest continued for five years. However, in the present case, the liability to pay interest stood discharged in the very first year. He contended that in the case of MIIC Ltd. (supra), the liability was a continuing liability, which is not the case in the present matter. He further pointed out from the judgment of the Supreme Court in MIIC Ltd.'s case (supra) that the option was on the assessee to claim deduction in the very first year when it discharged the accrued liability or to spread it over for five years. However, it was not open to the Department to spread over the liability for five years. He further contended that by discharging the interest liability in the first year, the assessee is saving the recurring liability of interest for the remaining life of the debentures because for the remaining period, the assessee is not required to pay interest on the borrowed amount. Mr. Dastur further contended that it was not open to the Department to tamper with the terms of the Issue. He contended that in this case, the Department has resorted to spread over by treating payment of interest as deferred revenue expenditure. He contended that the assessee has paid in the first year Rs. 55 (Rs. 2,72,25,000). That, Rs. 55 was the interest payable for five years, which has been paid in the very first year. He therefore contended that the assessee was entitled to deduction for Rs. 55 paid in the first year in its entirety and that the Assessing Officer was wrong in spreading over the deduction for five years. He further contended that such spread over for five years by the Department amounted to altering the terms and conditions of the Issue which was not permissible. He further contended that if the assessee would not have claimed deduction of Rs. 55 in the first year then, the Department could have denied deduction in the second, third and fourth years on the ground that no liability accrued in those years and no amount was paid during those years and, therefore, the Department could have rejected the claim of the assessee. He contended that the assessee has debited only Rs. 11 from second year onwards upto the date of redemption which comes to Rs. 54,45,000. This amount has been debited to the Profit & Loss Account. He contended that however, the Department has allowed deduction of Rs. 89,10,000 which is calculated on the basis of interest at the rate of 18 per cent per annum which the assessee pays to the Lenders, who have exercised Option No. 1, He, therefore, submitted that the Department has calculated the deduction not at Rs. 11 but at the rate of 18 per cent per annum, which was not permissible under the terms of the Issue. Mr. Dastur relied upon the judgment of the Bombay High Court in the case of Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751. In that case, the amount was payable in instalments and yet, the Bombay High Court has ruled that the deduction for the entire amount should be given in the first year because, the liability accrued in the first year. He, therefore, contended that the MIIC Ltd. 's case (supra) has no application to the facts of the present case. He contended that the liability to pay interest did not stretch for five years because, it was paid in the very first year. He further contended that in this case, the assessee was required to pay interest of Rs. 4,45,50,000 but by paying in the first year Rs. 2,72,25,000 upfront, the assessee has been able to save payment of interest to the tune of Rs. 1,73,25,000. Mr. Dastur contended that even according to the Department, Rs. 55 equal to Rs. 2,72,25,000 should not be spread over. However, by reason of the assessee making payment of Rs. 2,72,25,000 in the first year, the assessee is put to a disadvantage as the assessee is paying the interest for five years in the very first year. He contended that in this case, the Department has given deduction per year of Rs. 89,10,000 for five years in all amounting to Rs. 4,45,50,000 whereas, the assessee is claiming deduction of Rs. 2,72,25,000. Therefore, the assessee is claiming deduction of an amount which is less than what the Department has granted by Rs. 1,73,25,000. He contended that in this case, the Department has wrongly invoked the judgment of the Supreme Court in McDowell's case (supra). He contended that the Department has obliterated the second option under the terms of the Issue given to the Lenders by calculating the spread over of the deduction at 18 per cent which rate has been borrowed from Option No. I. He contended that it was not open to the Department to obliterate Option No. II. Mr. Dastur relied upon large number of authorities in support his above contentions.
11. Mr. Dastur next contended that in this case, the assessee borrowed in all Rs. 6,00,00,000 (Rs. 4,95,00,000 in the first year ending 31-3-1996 and Rs. 1,05,00,000 in the second year ending 31-3-1997). He contended that two alternatives were given to the Lenders. That, the Lenders were free to opt for interest on half-yearly basis at 18 per cent per annum for five years or to receive upfront payment in the year of allotment. He contended that the Lenders therefore, under the second option, had a right to receive the discounted amount of interest. He contended that in other words, the assessee brought the present value of Rs. 90 in the very first year (18 X 5). He contended that the discounted value of interest was worked out at Rs. 55 i.e. the present value of Rs. 18 per annum for five years was worked out at Rs. 55 and, therefore, as the Lenders opted for this option, they received Rs. 55 in the first year instead of receiving Rs. 90 over a period of five years at the rate of 18 per cent per annum. Therefore, instead of spreading Rs. 90 over a period of five years, the assessee has paid Rs. 55 in the first year and, therefore, assessee stood to gain because instead of paying Rs. 90 over a period of five years, the assessee has paid Rs. 55 in the first year. Mr. Dastur next contended that although in the Profit and Loss Account, the assessee has not debited Rs. 55 in the first year, it is entitled to claim deduction for Rs. 55 paid in the first year. That, the assessee was maintaining the Mercantile System of Accounting and its liability to pay interest accrued in the very first year. It was thus contended that had the assessee paid Rs. 55 at the end of five years and if the assessee was claiming deduction in the first year, then the Department would have been right in refusing deduction. However, in this case, the assessee has paid Rs. 55 in the first year itself and, if so, the assessee was entitled to deduction in the first year itself for two reasons viz. that the assessee is maintaining its account on accrual system and secondly, the liability has been discharged in the very first year. It was contended that there was no provision under the Act under which the liability incurred by the assessee could be reduced. That, Rs. 55 had gone out of the pocket of the assessee for all times and, therefore, the assessee was entitled to claim deduction of the entire amount of Rs. 55 in the first year. It was urged that the analogy of Deep Discount Bonds did not apply to this case as in this case, the liability arose in the first year and it was paid in the first year whereas, in the case of Deep Discount Bonds, the liability to pay arises in the fifth year.
12. Mr. Dastur next contended that in the present case, the Department has accepted that payment of Rs. 55 was a revenue expenditure. That, there is no dispute on the nature of the expenditure. That, only the manner of allowing such expenditure under the Act is in dispute. That, although in the final accounts the assessee debits on the basis of deferred revenue expenditure, for tax purposes, the assessee claims deduction for the full amount in the first year because the entire liability arose in that year which also was the year of payment. That, it was not open to the Department to go beyond the terms of Issue/agreement between the Lenders and the borrower. He contended that in this case the Department has calculated the spread over at the rate of 18 per cent per annum. That, this rate has been borrowed from the other option and, therefore, Rs. 55 is nothing but interest at 18 per cent per annum and, therefore, the upfront payment is on account of interest only. However, the Department has directed the spread over by taking into account the discounted value of interest and, therefore, in the present matter, the character of the amount under both the options is the same viz. interest. That, the matter was only of a Valuation. Mr. Dastur next contended that in this case at the rate of 18 per cent per annum, the interest payable was Rs. 4,45,50,000. However, it has been settled by payment of Rs. 2,72,25,000 because according to the assessee, it is better to pay Rs. 2,72,25,000 instead of Rs. 4,45,50,000 and, thereby save Rs. 1,73,25,000. It was contended that under the circumstances, the discounted value of interest cannot be taken into account. That, in other words, the assessee got rid of annual liability of Rs. 89,10,000 by making immediate payment of Rs. 2,72,25,000 in first year.
13. Mr. Dastur next contended that in this case, the assessee is claiming interest to the extent of Rs. 2,72,25,000 which the Assessing Officer disallows but, while disallowing, the Assessing Officer gives deduction to the assessee at the rate of Rs. 89,10,000 amounting to Rs. 4,45,50,000 over five years and, therefore, even the Assessing Officer accepts the contention of the assessee that Rs. 2,72,25,000 did not constitute capital expenditure but it constituted revenue expenditure. Therefore, the Assessing Officer has given to the assessee deduction of a larger amount by Rs. 1,73,25,000. However, Mr. Dastur concedes that in absolute terms, the Assessing Officer has given to the assessee more deduction but not in terms of the present value. He contended that the present value was Rs. 4,45,50,000 spread over five years which was the same as Rs. 2,72,25,000 in the first year. Therefore, there is no loss to the revenue. Therefore, the entire question is academic. Mr. Dastur contended that it was not open to the Assessing Officer to insist on the spread over particularly when the liability under the contract arose to the assessee in the first year unless the Assessing Officer holds that the contract was a sham. However, in this case there is no such findings and, therefore, the Assessing Officer was not entitled to change the terms of the contract. In the circumstances, the Assessing Officer was bound to proceed on the footing that the liability had accrued in the assessment year in question i.e. the assessment year 1997-98. That, if the assessee pays rent in advance in the first year under a contract which states that there shall be no refund of the rent paid then the assessee must get deduction in the first year itself and, therefore, the only question which the Assessing Officer was required to decide was whether there was a liability to pay interest during 1996-97 itself and if so the assessee was entitled to obtain full deduction during the assessment year 1997-98. He contended that the Courts should not take into account extraneous factors while deciding the claim of the assessee. In this case, he pointed out that the Tribunal has proceeded on the footing that the entire measure was adopted because, the assessee had surplus income whereas Maliram Makharia Stock Brokers Private Limited had brought forward losses. He contended that the assessee paid Rs. 2,72,25,000 up-front and further after five years the assessee repays the full face value of the debenture, with premium and, therefore, payment of Rs. 2,72,25,000 represented interest. Mr. Dastur relied upon the balance sheet to show that the entire amount of Rs. 6,00,00,000 continued to be the liability of the assessee right up to 31-3-2001. In the circumstances, the assessee was entitled to deduction for the full amount in the first year. Mr. Dastur, therefore, contends that in this case the spread over should have been refused because the liability arose in the very first year. Mr. Dastur contended that good accounting is not always the correct law. He relied upon the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172, 93 Taxman 502 and he contended that if the assessee was entitled to deduction for the full amount of Rs. 2,72,25,000 in the first year and that if the deduction depended on the terms of the contract, then it cannot be denied on the ground that the assessee has not debited the full amount to the Profit & Loss Account because according to the Supreme Court judgment, deduction does not depend on what the assessee debit but it depends on the provisions of the law. That, in this case the assessee has not debited Rs. 2,72,25,000 in the first year but that cannot be the ground for disallowing the deduction. He contended that tax cannot be levied on the basis of the entries which an assessee makes. He relied upon the judgment of the Gujarat High Court in the case of CIT v. Gujarat Mineral Development Corpn. [1981] 132 ITR 377, [1980] 4 Taxman 526. He also relied upon the judgment in the case of Buckau Wolf New India Engg. Works Ltd. (supra). Mr. Dastur contended that in this case the Assessing Officer has re-written the contract by obliterating the option given to the Lenders - Maliram Makharia Stock Brokers Private Limited and Sharp Knife Company Private Limited.
14. Mr. Dastur next contended that in the present matter, the Tribunal has held that the expenditure must relate to the income in the assessment year and that the benefit was spread over for a period of five years and, therefore, the expenditure must also be spread over. However, Mr. Dastur argued that the Tribunal erred in introducing the matching concept referred to above. He submitted that in the present case the liability accrued in the first year and, therefore, as held by the Supreme Court in the case of Mysore Spg. & Mfg. Co. Ltd. v. CIT [1966] 61 ITR 572, the assessee was entitled to full deduction in the first year and, therefore, the question of co-relating the expenditure to income/benefit for five years does not arise.
15. Mr. Dastur next contended that on the contrary in this case if the assessee had adopted the said amortization, the Department would have told the assessee that it was not entitled to deduction in the second year as no liability accrued in the second year and as no payment was made in the second year.
16. Mr. Dastur next contended that under the contract, option was given to the Lenders but, the Department has denied the option which amounted to re-writing of contract, which was not permissible to the Assessing Officer. In this case, he relied upon the judgment in the case of CIT v. Sri Bibhuti Bhusan Dutt [1963] 48 ITR 233 (Cal). Mr. Dastur contended that deduction under the Income-tax Act does not depend on the status of the assessee nor does it depend on the profit/loss of the assessee. He, therefore, submitted that the judgment of the Supreme Court in MIIC Ltd. 's case (supra) did not apply. Mr. Dastur, therefore, contended that the judgment of the Tribunal was wrong and in the circumstances, liable to be set aside.
17. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department contended that the option given to the Lenders like Maliram Makharia Stock Brokers Private Limited refers to upfront one-time payment. That, it does not talk of interest. That, it was payment made for getting the benefit of Rs. 45. That, if the assessee paid Rs. 55 to get the benefit of Rs. 45 for five years, then the Assessing Officer was right in spreading over the expenses over a period of five years. He contended that the payment of face value on the date of redemption after five years is of no consequence. He contended that if the argument of the assessee was accepted then computation of income will stand distorted because, the assessee got the benefit of Rs. 45 for five years. He contended that the judgment of the Supreme Court in the case of MIIC Ltd. (supra) was squarely applicable to the facts of the present case. That, in the present case Rs. 55 was on account of advance payment of interest of five years in the first year. He relied upon the judgment of the Calcutta High Court in the case of Hindustan Aluminium Corpn. Ltd. v. CIT [1985] 144 ITR 474, [1982] 11 Taxman 129. He contended that in the present case under the terms of Issue, two options were given to the Lenders. That, in the first option, there was payment of interest every six months and the same was the case under the second option. He, therefore, contended that amortization principle was applicable to both the options. He, therefore, contended that even Rs. 55 was payable by way of interest for five years. However, the same was paid in the first year by the assessee and, therefore, the Assessing Officer was right in coming to the conclusion that the principle of amortization was applicable to the facts of this case.
18. Mr. R.V. Desai, learned senior counsel for the Department next contended in support of Appeals filed by the Department that the Tribunal has failed to appreciate that the total borrowed capital on 29-3-1996 was Rs. 4,95,00,000 out of which, Rs. 2,72,25,000 was repaid on the same day as upfront fee and, therefore, the actual borrowed capital left with the assessee was only Rs. 2,22,75,000 which was used for business and, since part of the borrowed capital came to be refunded to the subscribers on the same day, the actual borrowed capital remaining with the assessee was only Rs. 2,22,75,000 and, therefore, the total borrowed capital of Rs. 4,95,00,000 in the first year was not utilized for the purpose of business and, therefore, the assessee was not entitled to claim deduction under Section 36(1)(m). He further contended that the entire scheme of Non-convertible debentures was a device to defeat the collection of tax revenue. That, in the present case, the assessee has not paid the discounted value of interest but has paid part of the face value of the debenture itself. He, therefore, contended that the Tribunal erred in giving spread over and the Tribunal erred in giving deduction of Rs. 4,45,50,000 at the rate of 18 per cent per annum spread over a period of 5 years. He, therefore, submitted that the decision of the Tribunal should be set aside.
Findings :--
19. At the outset, we would like to quote the terms of the Issue.
"3(a) Each Debenture shall carry interest at the rate of 2 per cent per annum above the prime lending rate and the interest shall be payable half-yearly.
(b) Each Debenture shall carry interest at the rate of Rs. 55 per debenture, payable upfront within thirty days of the exercise of option or from the date of allotment whichever is earlier."
20. These terms were not accepted by the Lenders. The final terms of the Issue were as follows :
"2. Terms of the Issue
(a) Upfront fee - The debenture shall carry upfront fee at the rate of Rs. 55 per debenture payable upfront immediately on allotment.
(b) Redemption Period- The debenture shall be redeemed at Premium of 10 per cent i.e. Rs. 10 per debenture in one instalment any time after the end of 5th year from the date of allotment but not later than 7th year from the date of allotment."
21. Before coming to the facts of this case, two concepts arc required to be borne in mind viz. Matching and Discount Rate. In the present case, we are assuming, for the sake of argument, that payment of Rs. 55 upfront (Rs. 2,72,25,000) on NCD face value Rs. 100 (Rs. 495 lacs) was an expenditure on revenue account. It has been so held by the Assessing Officer in this case. The question which arises for determination in this case is whether Rs. 55 per NCD [total Rs. 2,72,25,000] is allowable as deduction in the first year of allotment ending 31-3-1996 or whether that expenditure was to be apportioned over the period of five years which is the lifet of NCD. In this case, we are concerned with computation of taxable income and therefore, the system of accounting followed by the assessee viz-Mercantile is relevant. According to the assessee, it incurred the liability of Rs. 55 (Rs. 2,72,25,000) in the first year of allotment of NCD itself and, therefore, the entire amount of Rs. 2,72,25,000 was allowable in that year itself whereas according to the Assessing Officer, it was Deferred Revenue Expenditure (DRE) and, therefore, apportionable over five years.
A. Matching concept:--
22. The Mercantile System of Accounting is based on accrual. Basically, it is a Double Entry System of accounting. Under the Mercantile System of Accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the Mercantile System of Accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax insofar as monies due and payable by the parties to whom they are debited-Keshav Mills Ltd. v. CIT . Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. Under the Mercantile System of Accounting, this Matching is required to be done on accrual basis. Under this Matching concept, revenue and income earned during an Accounting Period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following Mercantile System of Accounting. This Matching concept is very relevant to compute taxable income particularly in cases involving DRE. It has been recognised by numerous judgments. In the case of Calcutta Co. Ltd. v. CIT the facts were as follows: The assessee bought lands and sold them in plots. When the plots were sold the purchasers paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee, in turn, agreed to develop the plots within six months. In the relevant Accounting Year, the assessee actually received only Rs. 29,392 towards sale price of the lands, but, in accordance with the Mercantile System of Accounting followed by the assessee, it credited in its accounts Rs. 43,692 representing the full sale price of the lands. At the same time, it also debited Rs. 24,809 as expenditure for the development it had undertaken even though, no part of that amount was actually spent. The Department, therefore, disallowed the expenditure of Rs. 24,809 on the ground that the amount was not actually spent. The assessee ultimately succeeded in the Supreme Court. It was held by the Supreme Court that the expression "Profits or Gains" in Section 10(1) of the Income-tax Act, 1922 should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purposes of earning the receipts is deducted therefrom. Accordingly, the Supreme Court took the view, that since the assessee was following Mercantile System of Accounting and since the assessee had credited the full sale price of lands in its accounts amounting to Rs. 43,692, the assessee was entitled to estimate the expenditure because, without such estimation of expenditure, it was not possible to compute profits and gains. This concept is also applied by the Supreme Court in the case of MIIC Ltd. (supra) under following observations :
"Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." (p. 803) Therefore, the Matching concept, which we have referred to is well recognised by various judgments of the Supreme Court. In this case, the issue is whether the entire expenditure distorts the profits of a particular year. In this case, we are concerned with computation of income and, therefore, Method of Accounting followed by the assessee is relevant because accrual of income is to be seen in the light of Method of Accounting. We may also point out that this Matching concept is also covered by Section 36(1)(m) read with Section 43(2), which defines the word "Paid". Both these sections form part of Chapter IV - Computation of Business Income. In this case, we are concerned with payment of Rs. 55 being interest of five years paid in the first year. The total amount involved is Rs. 2,72,25,000. The term "interest" has been defined under Section 2(25A) of the Act. Briefly, interest payment is an expense under Section 36(1)(m). Interest on monies borrowed for business purposes is an expenditure in a business - M.I.M. Mulhiah Chettiarv. CIT [1959] 35 ITR 339 (Mad.). For claiming deduction under Section 36(1)(m), the following conditions are required to be satisfied viz. the capital must have been borrowed; it must have been borrowed for business purpose and the interest must be paid. The word "Paid" is defined in Section 43(2). It means payment in accordance with the method followed by the assessee. In the present case, therefore, the word "Paid" in Section 36(1)(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e., Mercantile System of Accounting. In the first year ending 31-3-1996, the assessee borrowed Rs. 495 lacs (Rs. 4.95 crores) from Maliram Makharia Stock Brokers Private Limited whereas, in the accounting year ending 31-3-1997, it borrowed Rs. 100 lacs (Rs. 1 crofe") from Sharp Knife Company Private Limited. In other words, the assessee got the benefit of Rs. 495 lacs for the accounting year 31-3-1996 and Rs. 100 lacs for the accounting year ending 31-3-1997 (in all amounting to Rs. 595 lacs). Now, if the Matching concept is not applied then, the profits get distorted. In this connection, the following facts may be seen. For the year ending 31-3-1996, the assessee has submitted that it has incurred an expenditure amounting to Rs. 2,72,25,000 as and by way of interest deductible under Section 36(1)(iii) of the Income-tax Act. However, in the annual accounts, the said amount is not debited to the Profit and Loss Account. It is interesting to note from the Profit and Loss Account for the year ending 31-3-1996 that profit after tax was Rs. 1,86,34,016. Now if the expenditure incurred was Rs. 2,72,25,000 as submitted by assessee then the assessee could never have earned the said profit of Rs. 1,86,34,016. This is how the profit got distorted. In the Annual Report, assessee has conceded that Rs. 2,72,25,000 was deferred revenue expenditure to be written off over five years. In his order, the Assessing Officer has recorded a finding of fact which categorically brings out the matching concept. He has stated that for the accounting year 31-3-1996, profit after tax increased to Rs. 1,86,34,016 from Rs. 50 lakhs in the last year ending 31-3-1995. Therefore, the Assessing Officer was right in apportioning the expenditure at 18 per cent per annum on Rs. 495 lakhs amounting to Rs. 74,250 for 3 days because only then the estimated expenditure could match with income of Rs. 1,86,34,016. If expenditure was Rs. 2,72,25,000, net profit cannot be Rs. 1,86,34,016. The assessee followed mercantile system of accounting. In their annual accounts, the assessee has shown Rs. 2,72,25,000 as deferred revenue expenditure. Therefore, in our view, expenditure of Rs. 2,72,25,000 though paid did not incur and, in fact, what was incurred was Rs. 74,250 for year ending 31-3-1996. To put it in a different way, the annual accounts show that Rs. 2,72,25,000 represented interest of five years. If so, expenditure for five years cannot match with income of one year amounting to Rs. 1,86,34,016. It can only match in terms of the order of Assessing Officer. What we would like to emphasise is that, therefore, ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in the year in which it is incurred. However, in a given case, like the present one, the facts may justify the Assessing Officer to spread the expenditure over the life of the debentures because allowing the entire expenditure in one year might give a distorted picture of the profit of a particular year. Our discussion hereinabove shows that if Rs. 2,72,25,000 is taken as an expense incurred by the assessee in the first year then the profit shown by the assessee in this account amounting to Rs. 1,86,34,016 represents a distorted picture and to remove that distortion the only method is to spread over that expenditure as done by Assessing Officer. Moreover, the assessee has received Rs. 595 lacs for a period of five years. Therefore, it is a continuing benefit to the business of the assessee over the entire period and, therefore, the liability was required to be spread over the period of debentures. Further, in this very case, the assessee itself has invoked the Matching concept qua Premium. Under the terms of the Issue, Rs. 60,00,000 was payable by the assessee as Premium at the end of five years. One-fifth of Rs. 60,00,000 amounting to Rs. 12,00,000 have been debited to the Profit & Loss Account each year over the life of the debenture of five years and the assessee has estimated the Matching amount of income of Rs. 11,53,726 for the year ending 31-3-1997 and Rs. 12,00,000 for the year ending 31-3-1998. Therefore, in this very case, the assessee has invoked the Matching concept qua Premium but not for interest.
B. Discount rate :--
In the present case, the assessee received Rs. 495 lacs on 29-3-1996 from Maliram Makharia Stock Brokers Private Limited and Rs. 100 lacs from Sharp Knife Company Private Limited during the accounting year ending 31-3-1997. A Discount Rate is the rate of return used in Present Value calculations. According to the Assessing Officer, Rs. 2,72,25,000 and Rs. 55,00,000 paid to Maliram Makharia Stock Brokers Private Limited and Sharp Knife Company Private Limited respectively had to be discounted as the said two payments were Deferred Revenue Expenditure. Therefore, the Assessing Officer was required to apply a yardstick/ measure in order to compute the estimated expenditure. The Assessing Officer has applied the rate of 18% per annum on Rs. 495 lacs and on Rs. 100 lacs and has accordingly worked out the deduction. This rate of 18% is the Discount Rate. On that basis, for the year ending 31-3-1996, the Assessing Officer has worked out the deduction amounting to Rs, 74,250 which is interest at 18% per annum on Rs. 495 lacs for three days. Similarly, calculations are made in respect of Rs. 100 lacs borrowed by the assessee during the year ending 31-3-1997 from Sharp Knife Company Private Limited, which are as follows :
Statement showing the interest payment claimed as deduction by the assessee as against interest payment granted by the Assessing Officer.
Sr. No. Assessment year Amount Borrowed Interest payment claimed by the Assessee Interest payment granted by the AO
1.
1996-97 4,95,00,000 2,72,25,000 74,250
2. 1997-98 1,00,00,000 55,00,000 89,10,000 + 14,10,410 1,03,20,410
3. 1998-99 Nil No deduction is claimed 89,10,000 + 18,00,000 1,07,10,000 Note :
*Rs. 74,250 is the interest @ 18% per annum on Rs. 4,95,00,000 for three days i.e., from 29-3-1996 to 31-3-1996.
*Rs. 89,10,000 is annual interest @ 18% per annum on Rs. 4,95,00,000.
*Rs. 14,10,410 is the interest @ 18% per annum on Rs. 1,00,00,000 for the period from 19-6-1996 to 31-3-1997 and *Rs. 18,00,000 is annual interest @ 18% per annum on Rs. 1,00,00,000.
At this point, it is important to note that the rate of 18% per annum represents the measure/yardstick, which the Assessing Officer has arrived at on the basis of an analogy contemplated by Clause 3(a) of the terms of the Issue quoted hereinabove. In this case, we are concerned with Deferred Interest Option. However, as stated above, under Clause 3(a), there was one more option under which interest was payable at 18% per annum over a period of five years, which has been debited to the Profit & Loss Account year-wise. Therefore, the Assessing Officer has taken a clue from that option and he has estimated the deduction on yearly basis at the rate of 18% per annum. Therefore, the contract is not re-written as alleged by the assessee. In fact, according to the assessee's books of account, every year an amount of Rs. 54,45,000 is debited to Profit & Loss Account for five years in respect of Rs. 495 lacs, which comes to expenditure being estimated at 11% per annum as against the Assessing Officer's estimation at 18% per annum. Similarly, in the case of borrowing of Rs. 100 lacs, the assessee has estimated the expenditure per annum in its books at Rs. 11,00,000, which comes to 11 % on Rs. 100 lacs, whereas, the Assessing Officer has estimated the expenditure at Rs. 18,00,000 which is 18% on Rs. 100 lacs. It is vehemently urged on behalf of the assessee that the Assessing Officer has re-written the contract by applying the rate of 18% per annum while calculating deduction. It was pointed out that this rate of 18% was applicable to the option under Clause 3(d) and not to the option under Clause 3(6) of the terms of the Issue which dealt with up-front payment. We do not find any merit in this argument. Firstly, 18% is a yardstick/measure which is taken into account for calculating deduction. As stated above, 11% per annum has been taken into account by the assessee as a yardstick whereas, the Assessing Officer has taken 18% per annum. In the case of option under Clause 3(a), the actual amount of interest paid to the Lender and debited to the Profit & Loss Account has been treated as deduction whereas, in the present case which falls under the Deferred Interest Option, the Assessing Officer has not taken the actual debited amount calculated at 11% but, the Assessing Officer has taken the deduction at 18% as a yardstick and, therefore, it cannot be said that Deferred Interest Option is obliterated. It is important to bear in mind that every year a portion of the Asset is written off by the assessee in its annual accounts i.e., one-fifth of Rs. 55 i.e., Rs. 11 on the basis that it is an estimated expenditure. According to the Assessing Officer, the correct estimation should have been calculated at 18% i.e., Rs. 18. Generally, while estimating the expense/income, a rate is required to be determined. In this case, since under the option vide Clause 3(a) provided interest at 18%, the Assessing Officer has taken a clue from that rate and he has applied that' rate to the Deferred Interest Option also. Take a reverse case of a Lender receiving Rs. 55 upfront. He may show that amount as a liability in his balance sheet and every year a part of that amount would be reflected on the credit side of the Profit & Loss Account on which he was required to pay tax. In case of Deferred Revenue Income, an estimation would have to be made by applying the Interest Rate to calculate the Present Value. In other words, the rate of 18 per cent is the Discount Rate applied to estimate the deduction/expense for the purpose of Section 36(1)(m) of the Act.
23. In this case, therefore, if one keeps these two concepts in mind viz. Matching Concept and Discount Rate then, the matter stands resolved in law.
24. In the light of what is stated above, we are now required to examine the annual accounts of the assessee:
(a) Income-tax Appeal No. 89 of 2001 concerns financial year ending 31-3-1996 corresponding to the assessment year 1996-97. Under Schedule-"C" to the balance sheet under the caption "Secured Loans", the assessee is shown to have received Rs 4,95,00,000. The assessee had issued 4,95,000 secured Non-convertible redeemable debentures of Rs. 100 each. As stated above, Maliram Makharia Stock Brokers Private Limited had opted for option under Clause 3(b) of the terms of Issue (hereinafter referred to, for the sake of brevity, "Deferred Interest Option"). Accordingly, on the date of allotment viz. 29-3-1996, the assessee paid Rs. 55 per NCD out of Rs. 100 being the face value of the NCD totalling to Rs. 2,72,25,000. This amount is shown on the Asset side of the balance sheet under the caption "Debenture Interest Deferral Amount". It is shown as an Asset. It is shown as an Asset because, it represented interest of five years which has been paid by the assessee in the first year ending 31-3-1996. In the first year, there is no amount debited to Profit & Loss Account. The balance sheet refers to notes on Accounts. Under the caption "Major Accounting Policies", note "L" reads as follows: "Up-front payment on Non-convertible debentures has been treated as Deferred Revenue Expenditure which is not refundable and which is to be written off over a period of debentures". Therefore, reading the balance sheet, it is clear that Rs. 2,72,25,000 represented Deferred Interest of five years paid in the first year. Therefore, in the first year, profits of Rs. 1,86,34,016 is without debit. The Assessing Officer has estimated however the expenditure at 18 per cent per annum amounting to Rs. 74,250 for three days (i.e., Rs. 89.10 lacs per annum) to earn the above profit after tax.
(b) Income-tax Appeal No. 88 of 2001 concerns accounting year ending 31-3-1997 corresponding to assessment year 1997-98. In the year ending 31-3-1997, the assessee has raised a further loan of Rs. 100 lacs and in that year the assessee repays Rs. 55 lacs without debit to Profit & Loss Account. However, the assessee claims deduction of Rs. 55 lacs. Here also, there is a note appended under the caption "Major Accounting Policies", which states that upfront payment on NCDs has been treated as Deferred Revenue Expenditure which is not refundable and to be written off over a period of debentures. Therefore, the Assessing Officer disallows full amount of Rs. 55 lacs and allows deduction of expense at Rs. 14,10,410 calculated at 18 per cent per annum on Rs. 100 lacs.
(c) Similarly Income-tax Appeal No. 90 of 2001 concerns accounting year ending 31-3-1998. Schedule-"C" shows raising of secured loans by the assessee of Rs. 6,00,000 in all secured Non-convertible redeemable debentures of Rs. 100 each amounting to Rs. 6,00,00,000. In other words, during the accounting year ending 31-3-1998, no fresh loans came to be raised and, therefore, the figure of Rs. 6,00,00,000 is the same as for the accounting year ending 31-3-1997. The balance sheet for the year 31-3-1998 shows that the Asset which stood at Rs. 2,64,12,055 during the accounting year ending 31-3-1997 is reduced to Rs. 1,98,67,055. In other words, the Asset has been written off by debiting Rs. 65,45,000 to the Profit & Loss Account for the year ending 31-3-1998 under the caption "Deffered Debenture Interest Written Off". In other words, in the Annual Accounts, one-fifth of Rs. 55 is written off by the assessee and the Asset is accordingly reduced during the year ending 31-3-1998. Now in this year, the assessee has not claimed any deduction but the Assessing Officer has given deduction of Rs. 1,07,10,000 i.e., at 18 per cent per annum on Rs. 595 lacs.
(d) This writing off of the Assets thereafter continues for the accounting year ending 31-3-1999; 31-3-2000 and 31-3-2001. Finally, in the accounting year ending 31-3-2001, the asscssee's liability to redeem was to the tune of Rs. 6,00,00,000 which has been repaid during the accounting year 1-4-2001 to 31-3-2002.
25. Before concluding on this point, it may be mentioned that the annual accounts of the assessee shows that redemption after five years has taken place not from the profits of the fifth year but from the Debenture Redemption Reserve and, similarly, the premium at 10% payable in the fifth year under the terms of the Issue has been paid from Debenture Premium Reserve which has been created by appropriating one-fifth of Rs. 60,00,000 each year to the Reserve. The above analysis indicates two things. Firstly, in the accounts, the upfront payment has been treated as Deferred Expenditure by the assessee which is written off over the period of debentures. The assessee created an Asset on the basis of interest for five years being paid in advance in the first year and, thereafter, the said Asset is being written off over the period of debentures for five years. Therefore, the entire amount of Rs. 55 per NCD equal to total amount of Rs. 2,72,25,000 cannot be treated as expense in the first year. It would result in distortion as stated above. Secondly, the accounts show that the premium payable by the assessee at the end of five years was Rs. 60,00,000 and each year 2096 of Rs. 60,00,000 i.e. Rs. 12,00,000 has been charged to Profit & Loss Account. This is of some consequence. If the assessee's argument is to be accepted, it would mean that in the first year ending 31-3-1996 in which the assessee has earned profit after tax of Rs. 1,86,34,016, he gets full deduction for Rs. 2,72,25,000 on account of interest plus Rs. 12,00,000 which has been charged to Profit & Loss Account by way of premium in all amounting to Rs. 2,84,25,000. In other words, the assessee has spent Rs. 2,84,25,000 to earn profit of Rs. 1,86,34,016 which shows distortion.
26. It has been vehemently urged on behalf of the assessee by relying upon various authorities that Good Accounting is not correct law. In this connection, reliance was placed on the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). In this case, we are concerned with computation of taxable income. The annual accounts of the company show unequivocally that upfront payments were Deferred Revenue Expenditure. That, the assessee has treated the upfront payments as Deferred Revenue Expenditure to be written off over the period of debentures. Under Section 36(1)(m) of the Income-tax Act, interest on borrowed capital paid by the assessee is allowable as a deduction. In this case, the assessee follows the Mercantile System of Accounting. Therefore, the word "Paid" in Section 36(1)(m) is to be read in the context of system of accounting followed by the assessee. In this case, in the first year assessee claims to have incurred liability of Rs. 55 but no amount is debited to Profit & Loss Account. Similarly, assessee paid Rs. 55 for the year ending on 31-3-1997 to Sharp Knife Company Private Limited but in the Profit & Loss Account, the assessee has debited only Rs. 11 thereby creating an Asset for the balance amount of Rs. 44 which Asset is written off each year by debiting Rs. 11 to the Profit & Loss Account for five years. Therefore, if one reads, Section 36(1)(m) with Section 43(2) of the Income-tax Act, it is clear that payment of interest on borrowed capital for business purpose is a borrowing cost. Such borrowing costs has been capitalized partly and partly it has been treated as an actual expense. The assessee themselves have treated Rs. 55 as a Deferred Revenue Expenditure in their annual accounts. In the circumstances, if one reads Section 36(1)(m) with Section 43(2) of the Income-tax Act, it would be clear that the question of allowances permitted to be deducted under diverse heads from Income, Profits and gains would differ according to system of accounting adopted by the assessee. For that purpose, one has to estimate the expenditure by applying the Matching concept and a proper Discount Rate. This rate is required to be applied as in this case the Assessing Officer was required to estimate DRE for the purposes of computing a proper deduction under Section 36(1)(m). In the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122, it has been laid down by the Supreme Court that in computing the balance of profits and gains for the purposes of income-tax, two principles have to be kept in mind. Firstly, the profits of any particular year or accounting period must be taken to consist of the difference between receipts from business during the year and the expenditure laid out to earn those receipts. Secondly, the account of profit and loss to be made out for the purposes of ascertaining that difference must be framed in accordance with ordinary principles of commercial accounting so far as applicable. For example, under ordinary principles of commercial accounting, values of stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price whichever is lower although there is nothing about this Valuation in the Taxing Statute. That, the Income-tax Act makes no provision with regard to Valuation. It charges for payment of tax, the income which is to be computed in the manner provided by the Act. That, it is the duty of the ITO to deduce a proper taxable income. That, there is no section under the Income-tax Act, which compels the ITO to accept a balance sheet of cash receipts and outgoings prepared from the books of account. On the contrary, the ITO is required to compute the income in accordance with the method of accounting regularly employed by the assessee and if the system adopted by the assessee does not result in ascertainment of proper profits then, it is the duty of the Assessing Officer to make appropriate adjustments and deduce true profits. This judgment of the Supreme Court in A. Krishnaswami Mudaliar's case (supra) also lays down the difference between Cash and Mercantile System of Accountings. It also invokes Matching concept. In this judgment, it has been held that when goods are sold on credit and the assessee follows Mercantile System of Accounting, a receipt entry is posted as on the date of sale although no cash is actually received on that day and a debit entry is posted when liability is incurred although payment on account of such liability is not made. That, in appropriate cases, the Assessing Officer may have to make appropriate variations where the system adopted by the assessee does not indicate the profits. The Supreme Court has further laid down that according to Mercantile System of Accounting, actual cash received during the year and actual cash outlay are treated in the same way as under the Cash System of accounting but, to the balance thus arising, there is added an amount of outstanding not collected at the end of the year and from which the liabilities incurred or accrued have got to be discharged at the end of the year. In this case, we are not concerned with the question whether the expenditure was on capital account or on revenue account as in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). In this case, we are concerned with ascertainment of true profits/value of the Asset and, therefore, the method of accounting followed by the assessee becomes relevant. Therefore, there is no merit in the argument advanced on behalf of the assessee that good accounting is not necessarily good law. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), one of the points which arose for determination was whether interest received by the assessee on short-term deposits during pre-commencement of business could be capitalized as accretion to capital and, therefore, non-taxable. Therefore, in the case, the issue was on the Nature of the Receipt. Hence, that case has no application. On the contrary, it has been held that Accounting Principles are relevant for ascertainment of profits made by a company or for ascertainment of value of assets of the company but, not for determining the nature of receipt. Therefore, the said judgment supports the view which we have taken as in this case, we are concerned with computation of income. It is important to note that Deferred Revenue Expenditure is of revenue nature but, because of its special features, it is spread over a number of years during which benefit of expenditure is expected to arise to the business. On facts, we hold that the liability was a continuing liability to pay interest spread over for a period of five years. In this case, therefore, the Assessing Officer was right in spreading over the deduction over the period of five years which was the life of the debenture. The Assessing Officer has not re-written the contract. Whether the deduction should be calculated at 18% per annum or 11% per annum is not in issue. In any event, it is a pure finding of fact. In the circumstances, we do not see any reason to interfere with the order passed by the Assessing Officer as confirmed by the Tribunal. We do not see any reason to discuss various authorities cited on behalf of the assessee as we are concerned with application of law laid down by the Supreme Court in various cases cited. Lastly, we may mention that in this case, the deduction has been calculated at 18% per annum whereas, if one goes by the books, it is at 11% per annum. Therefore, the assessee has got higher deduction. Consequently, the above question framed by this Court is answered in the affirmative i.e. in favour of the Department and against the assessee.
27. In this case, the assessee has claimed Rs. 55 (Rs. 2,72,25,000) as a deduction in the first year of payment to Maliram Makharia Stock Brokers Private Limited and Rs. 55 lacs as payment of interest to Sharp Knife Company Private Limited in the accounting year ending 31-3-1997 without applying the Matching concept. At the same time the assessee is also claiming deduction to the extent of Rs. 12 lacs being one-fifth of Rs. 60 lacs payable as premium on NCD in the fifth year on spread over basis. If the assessee's contention was to be accepted, then it would result in distortion of net income. In the circumstances the Assessing Officer was right in spreading over the deductions over the period of five years qua upfront payments. Therefore, the assessee's appeals being Income-tax Appeal No. 88 of 2001, Income-tax Appeal No. 89 of 2001 and Income-tax Appeal No. 90 of 2001 stand dismissed with no order as to costs.
28. Before concluding, we may mention that the Department has also preferred three appeals being Income-tax Appeal No. 155 of 2001, Income-tax Appeal No. 180 of 2001 and Income-tax Appeal No. 181 of 2001. These three appeals are filed by the Department against the order of the Tribunal on the ground that upfront payments represented repayment of the borrowed capital and, therefore, the assessee was not entitled to deduction under Section 36(1)(m). As stated in our judgment hereinabove, the Assessing Officer has recorded the finding of fact, which has been confirmed by the Tribunal that upfront payments were on revenue account. Therefore, we have decided these matters on the basis of that finding of fact. Therefore, the questions raised in the appeals filed by the Department are not answered. Consequently, there will be no order in Income-tax Appeal No. 155 of 2001; Income-tax Appeal No. 180 of 2001 and Income-tax Appeal No. 181 of 2001.
Conclusion
29. In this case, we are concerned with Deferred Revenue Expenditure, which is a special type of asset. In this case, we are not concerned with the nature of profits. In this case, we are concerned with ascertainment of true profits under the Income-tax Act and in order to ascertain such profits, we have to follow true accounting principles and we have to apply those principles in the light of the method of accounting followed by the assessee. In cases involving special types of assets, where profits cannot be deduced by following the method adopted by the assessee, the Assessing Officer is free to make adjustments as done in this case. Lastly, as stated above, in this matter, we are concerned with computation of taxable income and, therefore, true accounting principles will have to be taken into account.
30. Accordingly, all appeals are disposed of with no order as to costs.